Thank you for standing by and welcome to the Yum! China 3rd Quarter 2024 Earnings Conference Call. All participants are in listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Florence Lip, Senior IR Director. Please go ahead. Thank you, Operator. Hello, everyone.
Thank you for joining YoungChina's third quarter 2024 earnings conference call. On today's call are our CEO, Ms. Joey Wat and our acting CFO, Mr. Adrian Bing. I'd like to remind everyone that our earnings call and investment materials contain forward-looking statements, which are subject to future events and uncertainty. Actual results may differ materially from these forward-looking statements.
All forelooking statements should be considered in conjunction with the cautionary statements in our earnings release and the risk factors included in our findings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release, which is available to the public through our investor relations website
located at rl.yamchina.com. You can also find a webcast of this call and a PowerPoint presentation on our RL website. Please note that during today's call, all year-over-year growth results exclude the impact of foreign currency, unless otherwise noted. Now, I would like to turn the call over to Joey Watts, CEO of YamChina. Joey?
Hello, everyone, and thank you for joining us. I'm proud to share that we achieved strong results again in Q3 2024. We delivered robust sales growth as well as accelerated profit growth compared to Q2. System sales grew 4% year over year. Single sales index improved sequentially and reached 97% of prior year's level.
delivery sales achieved several digit growth as it has for 10 consecutive years. On a comparable basis, both restaurant margins and OP margins expanded year over year. Co-operating profit grew 18% and diluted EPS increased by 32%. As we execute our RGM 2.0 strategy,
we have a new focus on operational efficiency and innovation. Savings generated from improved efficiency allow us to reinvest in food innovation and our value for money offers. This broadens our accessible market. It also helps us capture more traffic, drive sales growth, and expand profit margins.
Meanwhile, our innovative business models, K Coffee Cafe and Pizza Hut Valve are gaining momentum and successfully capturing new customer demand. In the first nine months, we set several new records. $8.7 billion in revenue, over $1 billion in operating profit, 1,200 net new stores,
and over $1.2 billion returned to shareholders. We outperformed the industry in a challenging and fluid environment. Today, I will provide an update on our operations and store opening strategy. Adrian will then go through the financial performance and our latest capital return plan. I will start with operational efficiency.
We are making great progress with Project Fresh Eye and Project Red Eye. We introduced these projects in quarter four of last year and quarter one of this year, respectively. These projects are to enhance operational efficiency through innovations across all aspects of our operations. Project Fresh Eye has reshaped our operations
We are evaluating processes through the fresh eyes of our restaurant managers, redesigning to support them more effectively. By simplifying, centralizing, and automating key processes, we are easing the burden of restaurant managers so that they can focus on better serving customers.
We are also using innovative technology and automation in our operations. This makes us more efficient. For example, intelligent energy management reduces utility costs. Project Red Eye has created a fresh mindset to innovate and deliver results by spending better and buying better.
Our procurement teams are serving our marketing teams better and faster. Generated savings are passed on to our customers and fund innovations. We are also gearing our product design to optimize ingredient use and improve operational efficiency. These initiatives have enabled us to hone in on product innovations and value for money.
while expanding margins. On a comparable basis, Q3 restaurant margin improved 50 basis points year over year, and core OP margin expanded 140 basis points. Importantly, these are sustainable improvements that strengthen our business capabilities while driving high levels of customer satisfaction. Turning to sales,
It's true that consumers are becoming more rational and sophisticated in their choices. But we know that the demand is there. Consumers seek value for money, good quality, and emotional value. That's exactly what we are offering them, and it's working. We regard both system cells and single
sales growth is equally important. On one hand, we see ample opportunities across China to enter underserved markets and enhance customer assets. On the other hand, we look to balance our unit growth with same-store sales growth. Seven consecutive quarters of same-store traffic growth and sequential improvement
in same-store sales index for both KFC and Pizza Hut show the strength of our strategy. Our delivery sales grew 18%, continuing the double-digit annual growth YoungChina has maintained over the past decade. In quarter three, delivery sales reached around 40% of our sales mix. We have strategically adjust delivery fees
and introduce more entry price offerings to capture incremental consumer demand. We have enhanced our presence on aggregated platforms and expanded delivery coverage. Through these initiatives and more, we have captured incremental orders, especially from solo diners and value cautious customers.
As a result, both KFC and Pizza Hut have increased their market share on aggregator platforms. Even as we expand on aggregator platforms, we continue to maintain strong control over our business. Sales outside the delivery aggregators account for over 70% of our total sales, including dining, takeaway, and delivery. Let me share a few highlights on KFC.
We continue to breathe fresh energy into our flagship products. Take the new original recipe chicken burger as we introduced in quarter two. It's an exciting innovation, though not so obvious. Taking our cue from the classic way kids in China enjoy KFC's original recipe chicken with mashed potato.
We combined them into a new burger product. It's been very successful. Building on that success, we introduced an original recipe chicken with curry gravy in August. Tang Ga Li Yuan Wei Ji. This time, we add curry gravy to the original recipe chicken and mashed potatoes. Customers are loving it. As a bonus,
It doesn't require new ingredients in the stores. We maximize the use of existing ones while delivering exceptional value and taste to our loyal customers. In the first nine months, KFC sold nearly 200 million cups of K-Coffee, surpassing all cups sold in 2023. During the period, both sales and cups sold increased by about 30%.
As our membership data indicate that a significant majority of our members have yet to try K-Coffee, we see huge potential for growth. We have just opened our 500 side-by-side K-Coffee cafe, Kenya Guts Cafe, this morning, China time, with a prime location in Shanghai, Xujiahui. We are also tapping into strategic locations like college campuses.
and transportation hubs. By the end of the year, we expect to exceed 600 cafes. Our distinctive menu of coffee, drinks, and food, stunning value proposition, and cafe ambience are resonating well with the customers. Our disruptive limited time over of original recipe chicken latte, 选择原味鸡风味拉铁,
generated first disbelief, then curiosity, and finally trial. Perhaps surprisingly, it's become one of our best sellers. K-Coffee Cafes also effectively cross-sell to KFC's loyal customers, driving incremental sales and profits. K-Coffee Cafe's potential is exciting. Turning to Pizza Hut,
The brand is making solid progress. Pizza Hut opened nearly 300 net new stores in the first nine months, exceeding 3,600 stores. Since 2017, Pizza Hut has been strategically lowering its ticket average to drive traffic and enhance its mass market appeal.
We have launched more entry-price products designed for value-conscious customers and solo diners, capturing more smaller ticket orders. Pizza Hut has also improved its profitability. Co-OP increased 20% year-over-year in quarter three. Co-OP margin was up by 140 business points. We boost operational efficiency
with simplified ingredients and redesigned kitchen processes. This also allowed us to further improve our high food quality and service level. We continue to fortify our reputation as pizza experts. We recently upgraded the hand-tossed pizza dough for better taste, consistency, and easier preparation.
In addition, we continue to build on our signature product, durian pizza, now our number one best-selling pizza. One in every four pizzas sold in Pizza Hut China is now a durian pizza. We sold nearly 30 million durian pizzas year-to-date. We have expanded our success with durian burgers, launching the Pizza Dolby Burger,
with durian and pineapple. It sounds unusual, but it's perfect for our durian lovers and sold out quickly. Our breakthrough Pizza Hut Valve Store is looking like a promising vehicle for expanding our addressable market. It's been only five months since we converted our first store. Initial results are encouraging.
For Dain, we have seen significant single cell growth, driven by incremental transactions despite lower ticket averages. So far, we have converted around 150 stores, expanding from Guangdong to over 10 provinces, covering tier one cities to lower tier towns. We will continue to refine the model across different locations for both Dain
and delivery. With our dual focus on system sales and same-store sales growth in mind, let's talk about our store expansion plan. In Q3, we opened 438 net new stores, with over 1,200 net new stores year-to-date.
We are on track to meet our target of 1,500 to 1,700 net new stores this year. This growth is underpinned by strong new store performance. At KFC, the payback period held steady at two years. And at Pizza Hut, payback improved to two to three years.
Around 80% of new stores opened in the past two years turned profitable within three months of opening. Alongside our successful equity store model, we are accelerating franchise development to unlock additional opportunities. Our franchise strategy focuses on assessing strategic and remote locations, as well as the lower-tier cities
that were previously beyond our reach. We have built the infrastructure to support our franchisees from food safety to store management. We have also innovated new store models suitable for franchisees, such as KFC's Small Time Mini. So we are now prepared to pick up the speed.
Currently, franchisees represent 12% of KFC's store portfolio. The franchisee mix for net new stores increased from 15% in 2023 to 27% year-to-date, exceeding the guidance we gave at last year's investor day of 15 to 20%. We now expect this ratio will gradually
increased to 40 to 50% over the next few years. Pizza Hut will be on a similar path, but will take more time to get there. For Pizza Hut's net new stores, the franchise mix was 7% year-to-date. We anticipate this ratio will gradually increase to 20 to 30% over the next few years.
With that, I will hand the call over to Adrian Ding, our Acting CFO. By way of background, Adrian has been with YoungChina since 2019. Leveraging his investment banking background, Adrian has led multiple successful strategic investments and capital market projects in his role as our Chief Investment Officer.
He was also instrumental in establishing our Lavasa joint venture and building the business in China as our general manager of Lavasa GE. Adrian's combination of financial background with operational experience make him well suited for this position. I'm thrilled to welcome Adrian to his new role. Adrian. Thank you, Joey. I'm glad to be with everyone today for my first earnings call.
In the third quarter, we achieved strong results, with major KPIs trending positively. System sales rose 4%, and same-store sales index sequentially improved to 97% of prior year level. Restaurant margin expanded 50 basis points year-over-year on a comparable basis. 4-OP margin also saw a significant rise of 140 basis points.
As we grew our top line, core offering profits surged by 18%, and diluted EPS grew 19%, excluding the mark-to-market gain from our equity investments. As a reminder, retro margin on a comparable basis excludes VAT deductions, as well as temporary relief from landlords and government agencies received in the prior year.
For offering profits further excludes foreign exchange impact and special items. We're immensely satisfied with these meaningful sequential improvements in our quarter three results. They demonstrate our ability to outperform the industry in both good times and bad. With our confidence in our cash generation capabilities, we plan to step up our capital return to shareholders. First, let's take a closer look at our third quarter performance.
By brand, KFC system sales increased 6% year over year. Same store sales were at 98% of prior year levels with 1% same store transaction growth. Our strategy to widen the price range and capture lower ticket average delivery orders are yielding results. Entry price combos have driven incremental traffic and delivery sales continue to grow double digits.
Our quarter three ticket average was 38 RMB, 3% lower than prior year levels, but increased from 37 RMB in quarter two. Smaller ticket items, like coffee and breakfast, continued to outperform. Pizza Hut system sales increased 2% year over year. Same store sales were at 94% of prior year levels, with same store transaction growth of 4%.
Ticket average was 9% lower year over year. It is in line with our strategy to transform the brand to increase mass market appeal. Our entry price pizza, burgers, and single person meals attracted incremental traffic from value conscious consumers and solo diners, which of course lower per person spending. The wild store model is positioned with even more accessible pricing.
Piva Hut's traffic has grown in response to our strategy, and profit margins have improved year over year, thanks to our team's relentless drive for operational efficiency and innovation. Now, let's go through our margin and key cut lines. Our OP margin as a percentage of revenue was 12.1%. 100 basis points higher year over year, or 140 basis points higher on a comparable basis.
Resilient restaurant margin and savings in GNA expenses help us achieve that. Our restaurant margin was 17%, steady year-over-year. On a comparable basis, restaurant margin was 50 basis points higher. Savings in the cost of labor and occupancy and other costs offset the increase in COS. Cost of bills was 31.7%, 60 basis points higher year-over-year.
or 30 basis points higher on a comparable basis. We kept cost of sales rather stable compared to 31.5% in quarter two, while continuing to offer excellent value for money. Key factors include favorable commodity prices and savings from spending better and buying better initiatives under Project Red Eye. Cost of labor was 25.1%, 20 basis points lower year over year.
Improved operational efficiency more than offset wage increases from our frontline staff and the impact of sales deleveraging. Occupancy and other was 26.2%, 40 basis points lower year over year, or 60 basis points lower on a comparable basis. This came from more efficient marketing and advertising initiatives, as well as other cost optimization.
Our G&A expenses decreased 19% year-over-year. This was due to operational efficiency gains and lower performance-based compensation this year, among other factors. G&A expenses as a percentage of revenue were 4.5% in the quarter, down by 130 basis points from 5.8% a year ago. For the full year, we aim to keep the G&A ratio around 5%.
Operating profit was $371 million, growing 14% year-over-year. Core OP increased 18% year-over-year. Our effective tax rate was 27.3% in quarter three, on par with the same period last year. We expect a full-year ETR in the high 20s. Net income was $297 million, growing 21% year-over-year.
Our mark-to-market equity investment had a $26 million positive impact in Q3 this year, compared to a negative impact of $3 million in the same period last year. Excluding this impact, our net profit grew 9%. As a reminder, we received lower interest income this year from a lower cash balance. Diluted EPS was $0.77.
growing 32% year-over-year, or 19%, excluding the mark-to-market equity investment impact. Now, let's turn to capital return to shareholders. Since our spinoff, we've returned over $4 billion to shareholders. In the first nine months this year, we already returned more than $1.2 billion, including over $1 billion in share repurchases and $187 million in quarterly dividends.
We bought back more than 27 million shares, around 7% of our total shares outstanding, partially contributing to our EPS growth. Our cash position remains healthy, with net cash of $3.1 billion as of the end of the quarter. We're committed to returning excess capital to our shareholders.
A year ago, we set our three-year plan to return $3 billion to shareholders through dividends and share repurchases from 2024 to 2026. With our cash generation capabilities proven in good times and bad, we now plan to step up our capital returns by 50% to $4.5 billion over the same period. This includes $1.5 billion in 2024. Finally, moving on to our outlook.
We're encouraged by the recent stimulus policies. These measures are a positive step forward. But as you all know, such things can take quite a while to trickle down to consumers and thereby move the needle in businesses like ours. Entering the fourth quarter, we've not observed significant changes in market conditions and consumer sentiment. Despite this, we remain confident in China's midterm and long-term growth opportunities.
Quarter 4 is traditionally a low season for us, with smaller sales and profits. We maintain our focus on operational efficiency and innovation to pass on savings to our consumers. We expect these efforts to continue driving overall sales and profit growth. I am confident in our strategy and our ability to navigate this complex and evolving environment and achieve sustainable, long-term growth. As a reminder,
In Q4 last year, we benefited from 6 million in temporary relief, equivalent to around 30 basis points in OP margin, which we do not expect to repeat this year. Let me pass it back to Joey for closing remarks. Thank you, Adrian. Before we turn to Q&A, I would like just to recap the three key messages I want you to take away today.
Our quarter three results highlight our resiliency and growth strategy. With our dual focus on operational efficiency and innovation, we are well positioned to capture opportunities in this market. Both system sales growth and same source sales growth are key focus for us. Second, we remain bullish on China's long-term growth opportunities.
Our widened price ranges, optimized delivery strategy, and breakthrough business models help us broaden our addressable market. We continue to capture underserved customer segments with both equity and franchise new stores. Lastly, we maintain our dual focus on sustainable growth and capital returns to shareholders.
We plan to step up our three-year capital returns to $4.5 billion for 2024 to 2026. With that, I will pass it back to Florence. Thanks, Joey. Now, we will open the call for questions. In order to give more people the chance to ask questions, please limit your questions to one at a time. Operator, please start the Q&A. Thank you.
If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Xiaopo Wei with Citigroup. Hi, can you hear me? Julian, Adrian? Yes, we can. Okay, thank you. Thank you for taking my question.
Congratulations on a strong third quarter. I probably want to ask a long-term question. It is the first quarter we are seeing your bulls, your core OP margin, and you've been spending, and SimStore was down. As you know, the market has been focusing on SimStore sales for long, but it seemed to me that it's actually, as Joey said, the system sales is equally important as SimStore sales.
Shall we say looking forward, shall we looking more into the same store sales based on transaction volume rather than the same store sales value? Because as Julie readily pointed out, you guys have innovating format and manual, actually widen your pricing range. So the mix of your products or the ASP actually distort the traditional understanding of same store sales. If that's the case,
Is there any other areas you will build your economic skill in terms of enlarged volume to drive your margin resilience looking forward? Thank you for your long-term question. If I'm allowed to indulge myself, give a comprehensive view of our long-term strategy.
You know, quarter three actually is a good result and illustration of how YoungChina execute our RGM 2.0 strategy in the long term, with few focuses on multiple areas. As a CEO, I mean, I often get questions posed or decisions presented on either or, such as either simple sales or system sales.
The fact is the only acceptable answer is both. We want both. And then the same-source sales obviously is composed of the transaction. So the way that we deal with it is we really are pursuing dual focus because we cannot just focus on one or the other.
So I refer to several in my earlier remarks, but just to recap first, we have due focus on system sales growth and same-store sales growth. And in quarter three, obviously we deliver 4% system sales growth for the quarter, and also seven consecutive quarter of same-store transaction growth going forward. Because between the TA and TC, I think you can see,
Over long term, we focus on transaction growth, which really is the most important, one of the most important drivers for business like ours. Not to mention the growth is also supported by 10 years of delivery growth. Second, and that's related to your margin question, we have dual focus on operational efficiency and innovation.
So, and I certainly believe that any good company who want to survive need to do both. So for Q3 alone this year, we deliver 18% co-operating profit growth through multiple margin improvement project like project Fresh Eye, project Red Eyes. And then we reinvest our savings into multiple innovations.
such as food innovations, and then value for money, and then some breakthrough model innovations such as K-Coffee and Pizza Hut. And with this kind of operational efficiency and innovations, both K-Coffee cafe model and the 150 Pizza Hut valve store right now, they broaden our addressable market and capture new customer demand.
to grow the business. Third, we have dual focus on opening equity stores and accelerating franchisee development, and that helps, obviously, manage our capital return. And so far this year, we opened 1,200-plus new stores in the first nine months, and we are on the track to reach full-year target. The payback is good, and 80% of the new stores turned profitable within three months, as mentioned in the earlier remarks.
So at the same time, we are accelerating the franchisee opening to unlock opportunities in strategic location, remote or lower tier cities. But last but not least, the new focus on investing in business growth and returning capital to shareholders are also happening at the same time. So with the sales, with the product, at the end,
We are growing the business and returning the capital at the same time. So to summarize, in each of the above four areas, we do our best to avoid unnecessary compromises. And we use all our energy, our capability, creativity to get what we can of both, including both same-store sales and system sales. Thank you for your support.
Your next question comes from Lillian Lau with Morgan Stanley. Hey, thank you. Good evening, Joey, and congrats again, Adrian, for a new position, and also congrats for a very good result. My question is more on the near term, because I think Joey has been very clear on the long-term strategy. I think in the third quarter,
I noticed that for KFC, our pricing actually recovered pretty nicely compared to the previous quarter's trend. And I just want to check the thinking behind, i.e., do we see some elevated competition that make us less pressed on pricing, or have we done anything to really kind of support the pricing?
So related to that, any thinking about the pricing strategy in the next couple of quarters? Thank you. Thank you, Lillian. So in terms of competition, we certainly see the restaurant industry continue to grow. And then the global players are still trying to
invest aggressively in the China market, and the current players are going deeper to lower tier cities. And we also see some players rationalize promotional intensity in recent quarters, and some aggressive players slow down store openings this year. For KFC pricing, our strategy for KFC pricing and pizza pricing, actually in the short-term and long-term, is relatively transparent.
For KFC, we try to have stable pricing. So, you know, our quarter, this quarter is 38, I think. And then, so that's short-term. It's slightly higher than the previous quarter.
No, no, no, sorry. It's slightly lower than the previous quarter, but it's higher than 2019, so it's relatively stable. For PISA pricing strategy, we are very clear from 2017 onward, we try to be a bit more mass-market driven, so we have continued to lower the pricing so that it's more accessible.
So in the short and long term, that's pretty much our strategy in terms of pricing. Okay, thank you, Joey. Your next question comes from Ethan Wang with CLSA. Thank you. Hello, Joey. Hello, Adrian. So my question is on the franchising model.
I remember back in the investor day, we mentioned in the future, KFC franchisee store will be 15 to 20% of new stores. But obviously, we are now having higher hope on franchising model. So what makes this change? And if we expect more franchising model in the future, does that also mean we should expect lower capex spending going forward as well? Thank you.
Thank you, Ethan. I guess, you know, firstly, on your question regarding what makes the change, right, I think the key reason is we're ready. For instance, for KFC, you know, we have the new store model KFC Small Town Mini.
As we communicated previously, the capital expenditure of a store for that model is lower than 0.5 million RMB, which is roughly one-third of a regular KFC store. And for instance, for the newly rolled out Pizza Hut Wow, that model could be, you know, have a good potential in lower tier city as well and good for franchising.
Obviously, with recent years, you know, the franchisee quality in China has improved meaningfully as well. So, overall, you know, the store model readiness, you know, our QA readiness, digital capabilities, and the readiness of our franchisees enabled us to speed up the franchise opening here in China. As we mentioned during the prepared remarks, for KFC, we aim to gradually increase our net new open percentage
in franchise to be 40% to 50% down the road over the next few years. For Pizza Hut, it takes a bit longer, but overall, we hope to achieve 20% to 30% of net new open for Pizza Hut being franchise model over the next few years.
And speaking of franchise unit economics, obviously we want to, you know, remind everyone here that for each $100 of system sales generated by our franchisee, we recognize $40 to $45 as our revenue. And that breakdown includes 6% to 7% of the $100 being our relative fee collected and initial fee collected.
And also, the other $35 to $36 out of the $100 being the revenue from transaction with franchisees. That's mainly in the areas of COS and other services, including AMP and others.
And in terms of our cost, you know, franchise expense, you know, 3% of license fee will need to pay to young brands. And our expense for transaction with franchise fees is currently incurred around our cost. But in the future, there is the potential for us to retain certain margin in the services with franchise fees because we have savings from Project Red Eye and Project Fresh Eye.
And whether that will, you know, lower our capital expenditure in terms of, you know, I guess ROIC, that's a real question. Over the long term, we do expect that will help in terms of ROIC, but in the near term, the impact will be immaterial because, as we mentioned, the overall pacing of step-up in franchising will be gradual over the next few years. Thank you, Ethan.
Thank you, Adrian, and congratulations on the result. Thank you. Thank you. Your next question comes from Michelle Chang with Goldman Sachs.
Hi, Joey, Adrian. Thanks for having the time to ask questions. So my question is still more on the short term. I think, Adrian, you earlier mentioned that quarter today, we didn't see a significant change yet, even we are positive on stimulus. But considering last fourth quarter, the base, supposedly, should be easier. So are we still seeing, like, incremental sequential improvement in fourth quarter trend?
And also, looking ahead, when we consider both KFC and Pizza Hut, it looks like KFC's same-store sales is still much more resilient, and compared with the pre-COVID level, still much closer. So, when we look for same-store sales growth going forward, we see that Pizza Hut's pricing trend will be gradually stabilized, and KFC actually has room to see the pricing improvement next year. Thank you.
Thank you, Michelle, for your question. As I mentioned in the previous remarks, we're quite encouraged by the stimulus policies, but obviously it will take time, you know, to influence consumer behavior and impact businesses like ours. I'd like to give some more color into quarter four performance, especially in the top line.
So entering quarter four, as I mentioned in the prepared remark, we've not observed significant changes in consumer sentiment, nor in the macro situation. In terms of the October Golden Week holiday, our SSSG slightly improved year over year during the Golden Week. However, the consumer spending remained cautious post-holiday. I think that's a common phenomenon we observe for this year. After a long holiday, the consumer spending returned to be cautious for a short span of time after the long holiday.
Overall speaking for Q4, we still face some top-line pressure, but we are confident in our ability to outperform peers in both the good times and bad, and we are also reasonably confident that our Q4 Same Short Transaction Index will continue to be positive for another quarter.
Lastly, but importantly, you know, we really focus on things within our control. So we continue to execute our strategy, which has proven to be quite effective to capture incremental traffic and protect our margins. We believe we're well-positioned to continue to capture consumer needs with our flagship product, stunning value, deliver strategy, and breakthrough models.
I think the second part of the question relates to the difference between KFC and Pizza Hut. Obviously, you know, given the consumers are more rationalized in their spending, Pizza Hut, with their higher per person spending, currently is facing a little bit of bigger headwind.
compared to KFC, which is really having a super robust, resilient model. However, I think we're doing all the right things for Pizza Hut, lowering the TAs, lowering the per person spending, and also devising the new store model, such as Pizza Hut WOW, which is even more accessible. And as we mentioned in the prepared remarks for both this quarter and the previous quarter, that we do see some initial encouraging results for WOW. Particularly on the dining side, we see a meaningful increase in SSG there for WOW.
Obviously, it's only five months since we converted the first WoW store back in May, so we're still kind of iterating a debunking store model. Hopefully, over the steady state, the Pizza Hut WoW will enable the Pizza Hut to get to a different and much larger total addressable market.
And I think your final part of the question is more on, you know, the midterm for next year on the TA trend for Pizza Hut and for KFC. As we mentioned, you know, for KFC, we look at the TA, we expect the TA to be steady over the mid to long run, although there might be some short-term fluctuations depending on macro and competitive dynamics.
For Pizza Hut, it's our strategy to lower the TA, and then we have been doing that reasonably effectively with the positive transaction growth, you know, over the past quarters. And we look to continue that strategy down the road as well. Thank you, Michelle. Thank you, Adrian. I'll just add some color about the Pizza Hut. So the Pizza Hut model, good progress, but one step at a time. As Adrian mentioned, we see
a very nice improvement in the dying stem cell cells. And out of 150 PISA biocells, actually one-third, 50 cells are in Guangdong in the South. And because of the scale of the PISA biocell relative to the Guangdong total cell, we see some meaningful improvement of the Guangdong stem cell cells, which is exciting.
But again, you know, we have over 3,600 stores for pizza around the country right now. So it will take some time. But the progress is good. Last but not least, quarter four is a small quarter. So a lot of the numbers could swing either way. Thank you so much. Thank you, Joey, for the details. Thank you.
Your next question comes from CJ Lin with CICC. Thank you, Joy and Adrian. Congrats on another strong quarter and generous shareholder return. I have one question. So we have seen some food safety cases overseas. So how do we balance on one hand the cost control and on the other hand the quality of the product and service? Thank you. Thank you, Sijie.
Well, first of all, I presume you referred a food safety case overseas that's caused by raw onion. First of all, we only use cooked onion, so that should not have similar implications to our business. When it comes to the overall food safety versus cost control, it's always our strong philosophy and operation that we put food safety at the
most important position. We are fully compliant with regulations. And also, it's one of the few issues that if there's any issue, we report it directly to myself and then we also report it to our board. Our board, we have a food safety committee on this one.
So we absolutely treat it as highest importance and priority. And it's reflected in our holistic quality assurance system and our comprehensive food safety process within our entire value chain from suppliers to logistics all the way to our stores. And last but not least, I just want to reassure you that
our investment in our digital supply chain in the last many years have paid off. We have very good visibility means digital visibility of our food safety without infantry and to the point that the salt replenishment to the store is automatic. So
is absolutely important. Last but not least, we have more than 300 plus QA employees spread across China focusing on this important matter in addition to the technology that we have in that to monitor this particular important priority. Thank you so much. Thank you, Joy.
Our next question comes from Anne Ling with Jackery's. Hi, thank you. Hi, management team. Just a question on K-Coffee. Now we're 500 stores. What we hear on the ground is that it's been doing amazingly good. So just want to check whether you can share with us the incremental benefit because it's a side-by-side store.
with your existing KFC. So maybe would you share with us what is the incremental same store benefit and also in terms of profitability, if there's anything that you can share with us. Thank you. Thank you, Anne. Thank you. Well, long story short, the incremental sales uplift to the store we have observed is a single digit
And it does produce incremental profit because of our very unique operating model. So that is the short answer. In terms of longer answer, we are indeed very excited. And today, actually, we opened our 500th store in Xujiahui, in Shanghai, right next to our headquarter and in a very prime area in Shanghai.
the increase of the sales, or the number of cups, is 30% plus, roughly. And this is very exciting, especially when we take the background of the overall market, think of sales in coffee as the background. And the opportunity here is,
A significant majority of our members, of our Yum China members, have yet to try our K-Coffee. And in our side-by-side model, the cross-sell from KFC to K-Coffee is amazing. So we are excited about it. And it took us 10 years from selling coffee to build the first K-Coffee cafe.
but we see really good progress. We have 100 stores in March, and now we have 500 stores, and then by year-end, we expect to exceed 600 plus stores. And we are expanding to campus and transportation location as well. The food is good. We have very distinctive coffee, sparkling coffee, the float, and then the egg tart or the gigantic egg tart.
So things are looking very exciting and positive. Thank you, Anne. Thank you. Your next question comes from Walter Wu with CNDI. Hi, hello. Joey, an agent, can you hear me? Yes. Okay, thank you. Congratulations to your resilient results, and thanks again for all the efforts.
So my question is about the Pizza World store format. So can you comment on the sales and margin performance of the Pizza World stores and also the mid-term room for potential growth? And are they suitable for all the regions in China? And also, well, I remember the last time when I dined in the World stores, the menu looks really appealing and there are lots of choices and the prices are cheap. And however, when I really ordered,
Many of the items were just not available. So this has disappointed me a little bit. And do you think this is a problem? And how do you see the store format now and going forward? And also, we are also aware of your new store format called KPro. Are there any infos that you are ready to share? Thank you. Thank you. So for P5.0, I mean, let's take a step back. It's only really innovation that happens.
only five months ago. So I think our speed of blowing out is very fast already. We are at about 150 stores. And the breakthrough model is very exciting. As I mentioned in the prepared remarks, the impact on the buy-in, think-for-sales is very exciting.
There's more work to be done for the delivery side. And then in terms of the profit, we continue to work on it. Well, let me just bring back our dual focus. Innovations and operational efficiency. Operational efficiency and innovation. It goes both ways. So for our core business,
we achieve operational efficiency, and we take the saving, and we invest in innovation. For PSAR Valve, we have the innovation first, and that is reflected in exciting sales. But the operational efficiency will come later, which I hope address your disappointment of the product availability, because it does not happen
automatically, and that's another reason why whenever we turn around business, KFC or later on Pizza Hut, we always focus on sales first, profit later, one step at a time. So for Pizza Valve, go back to our framework, we have the innovations first, and then operational efficiency later. So I believe that things are in good progress,
And I'm very happy to see what have we achieved so far for PizzaVal, but a lot more work to be done. It's only five months. Regarding KPro, we have been opening a few, a small number of KPro stores in Hangzhou, Shanghai, Guangdong, Guangdong actually. And it's still small right now, and obviously targets health-conscious consumers with products
energy bowl and smoothies, very healthy choices. And it's still in pilot stage, by the way, so there's still a lot to be learned. But that's one thing that we already are doing, which is sharing the learning from K-Coffee
Again, it's side-by-side. The new stores are side-by-side with the KFC Core Store so that we can share staff, we can share some investment of the cat pets. But that's still early days. Okay, thank you. Thank you. Your next question comes from Linda Huang with Yumsee.
Yes, my question is regarding for our capital allocation. We appreciate that the company step up the total return to $4.5 billion. And please correct me if I'm wrong, because based on your cash flow, right?
I found that every single year, our free cash flow will be around 700 to 800 million. But if we return back to 1.5 billion, that means that probably in three years, we can use up all our cash in our balance sheet. So I'm just wondering, based on this, the capital return, does that mean that for the three years, next three years, we will just purely focus on the organic growth, and we never think about any like a big M&A will happen?
in the next three years, or we can strike the balance if there's a big deal coming up and we are willing to take on some debt to take any M&A opportunity. So that's my question. Thank you.
Thank you, Linda. I guess there are two parts of the question. Firstly, regarding the sustainability of our capital return, obviously we're very confident in our ability to generate our cash, and as we mentioned, we have due focus on our business growth and return to shareholders, due focus again.
So for 2024 to 2026, we plan to step up our return from $3 billion to $4.5 billion. That includes the $1.5 billion for this year, 2024. And as a question regarding the longer term, obviously, as you correctly pointed out, we probably cannot do $1.5 billion every year forever.
But, you know, I think in terms of our company's philosophy, we have always been, you know, shareholder value conscious. So we'll continue to evaluate, you know, how best to deliver long-term shareholder value. And, you know, obviously, I will not be surprised down the road, we will be able to return a meaningful portion of our free cash flow generated each year to our shareholders beyond 2026. Obviously, we have no concrete plans yet, but we'll provide some more concrete guidance down the road at an appropriate time.
On your second question regarding M&A and strategic opportunities, we have been very prudent in terms of our M&A approach. Obviously, we prudently and proactively evaluate potential M&A opportunities.
both historically as well as in the future. And we'll only, you know, go ahead with M&A to the extent it makes sense and creates value for shareholders. So, you know, obviously for each of the M&As, as you know, we'll actually have a robust discussion with our board as well.
To the extent if a very major M&A comes out, and then to the extent if it makes a lot of sense to Yum! China, then we may or may not adjust our capital return plan. Obviously, we may or may not take on debt to fund an M&A, depending on the size of the M&A. But again, we are very prudent in terms of our M&A approach. We only do M&As to the extent it's super sensible to our shareholders. Hopefully that addressed your question. Thank you, Linda. Okay, thank you very much.
There are no further questions at this time. I'll now hand back to Niki Lipp for closing remarks. Thank you. Thank you for joining the call today. For further questions, please reach out through the contact information in our earnings release and on our website. Thank you. Thank you. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.